Low private capital expenditure a damper on Indian economy

capex growth, private capital expenditure
As government spending slows, the spotlight shifts to private capital expenditure to fuel India's ambitious growth path.

Private capital expenditure: The Reserve Bank of India has urged the private sector to raise capital expenditure to help sustain India’s growth momentum. While the Indian economy has shown impressive growth in the first half of the fiscal year 2023-2024, the private sector has not done its bit when it comes to capital expenditure, says an article in the RBI monthly bulletin. It is essential for corporations to step up capital expenditure, and the government is relying heavily on them to sustain the growth momentum.

The central bank has articulated that the corporate sector must take significant steps to alleviate the government’s burden of capital expenditure. To encourage private investment, the 2024-25 Interim Budget has enhanced the financial market’s outlook. The RBI’s February bulletin, in its ‘State of the Economy’ section, says businesses and institutions need to leverage these improvements, emphasising capital expenditure and fiscal consolidation. This focus has led to reduced government borrowing and lower borrowing costs.

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Role of private capital expenditure

India’s growth momentum hinges on a delicate dance between public and private capital expenditure. While the government has taken the lead in recent years, boosting infrastructure and fostering an investment climate, the baton is now being passed to the private sector. In the interim Budget for financial year 2024-25, the government has announced a decrease in market borrowing for FY25 compared with FY24, with gross and net market borrowings projected at Rs 14.13 lakh crore and Rs 11.75 lakh crore, respectively. This represents a significant cut from the previous fiscal year.

Finance minister Nirmala Sitharaman, in her Budget speech, recognised that private investments are scaling up, which has enabled the government to reduce its borrowing. This reduction in government borrowing will make more credit available for the private sector. For some time, the government has led capital expenditure, fostering a virtuous cycle of investment. Such investments are crucial as they drive employment, income generation, and consumption, which, in turn, stimulate further investments.

However, the future of India’s growth largely depends on the corporates, which has been reluctant to increase spending. Despite reports of positive business sentiment, the reality shows a more cautious approach towards investment.

In December 2023, Policy Circle reported a slowdown in private capital expenditure, as Indian companies faced global economic challenges. This slowdown was evident throughout 2023, with corporate revenue growth impacting capital expenditures. This situation prompted Chief Economic Advisor V Anantha Nageswaran to encourage companies to invest more aggressively. In contrast, 2022 saw a resurgence in private spending, initiating a new cycle of private investment.

The data shows a decline in fixed asset growth among non-BFSI companies in the first half of FY24, contrasting with the growth seen in the latter half of FY23. With consumer demand low and a tight monetary policy aimed at controlling inflation rather than promoting growth, investment in capacity expansion has been subdued. However, analysts predicted in December 2023 that a revival in private capital expenditure might occur as the monetary policy cycle reaches its peak.

This prediction seems to be materialising, as indicated by RBI Governor Shaktikanta Das during the February monetary policy announcement. He noted that the investment cycle is gaining momentum, with private corporates showing strong investment intentions. The RBI report also mentioned that corporate balance sheets are robust, which could further encourage private sector investment. As inflation decreases, a stable environment may emerge for corporates to plan expansion strategies in response to anticipated demand increases. Retail inflation eased to a three-month low of 5.1% in January, although it remains above the RBI’s preferred threshold of 4%.

Achieving a growth rate of about 7% requires lifting the investment rate from around 30% of GDP by approximately five percentage points in the coming years. While the government has focused on capital expenditure in previous budgets, the onus is now on the private sector. Limited demand may be inhibiting investment, suggesting the government could introduce measures to stimulate business enthusiasm. Historically, Indian businesses have shown a cautious approach to risk-taking. Addressing this mindset could be crucial for spurring investment. Another factor behind low capital expenditure by private sector could be cautiousness amid global economic headwinds. 

Achieving the desired growth trajectory necessitates a collaborative effort. While the government has laid the groundwork through increased public capital expenditure, the onus now lies on the private sector to seize the initiative and translate positive intentions into concrete investments. This, coupled with measures to address risk aversion, could unlock India’s true economic potential.